Submitted by: Submitted by kuwait5
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Category: Business and Industry
Date Submitted: 11/25/2010 06:25 AM
Factors in Computing Depreciation
Cost
Usually it is estimated, and expressed in years, units, miles, or output.
Useful Life
residual value (salvage value ) is estimated , and expected cash value at end of useful life
Residual Value
Depreciation Methods
Depreciation Expense = (Cost – residual value) / useful life
Straight-line
Depreciation per unit =
(Cost – Residual value) /Life in units
life
Units-of production
Depreciation expense =
Depreciation per unit x activity during the period
life
Declining- balance
(Cost – Accumulated depreciation)* 2/ life
life
Sum of year digit
To calculate depreciation charges using the sum of the year’s digits method, take the expected life of an asset (in years) count back to one and add the figures together. Example:
10 years useful life = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 Sum of the years = 55
In the first year, the asset would be depreciated 10/55 in value
Second year would be depreciated 9/55
Third year would be depreciated 8/55, etc.
example
a $5,000 computer with a $200 salvage value and 3 years useful life would be calculated as follows:
3 years useful life = 3 + 2 + 1 Sum of the years = 6
In the first year, the computer would be depreciated by 3/6ths *(cost – S.V) which is 3/6*(4,800)= $2,400
The second year, by 2/6 * 4,800 = $1,599.84
and the third and final year by the remaining 1/6 *4800 = $800.16 the third year.
NOTES:
Book value = Cost – Accumulated depreciation
Accumulated depreciation increases over time.
Book value decreases over time